China’s growth model and structural unbalance in the open economy

Abstract

The Chinese economy has been significantly affected by the global financial crisis. Moreover, a rapid decline in growth rate can be mainly attributed to the expenditure structural unbalance, which takes root in its uneven national income distribution. Furthermore, the uneven national income distribution is the result of the extensive pattern of China’s economic growth in the open economy. The extensive pattern is characterized by labor-intensive export-led growth model. The need for high growth rate and fiscal revenue maximization forces local governments to compete against each other to get FDI by undervaluing production factors, resulting in the extensive pattern of growth. From an institutional point of view, uneven social power between government and public, central government and local governments, capital owners and labor force, and so on, can be viewed as the main reason for the extensive pattern of growth and uneven national income distribution. Low wage, which has been the main factor for the comparative advantage, now turns out to be barriers to boosting domestic demand. The technology lag in the manufacturing industry also has a significant negative impact on improving labor productivity and increasing per capita income. Hence, to deal with the recession, not only quantitative easing, but also structural adjustments are needed.